Case I & Case II Bidding Projects: Evaluating Competitive Regime

S. C. Manocha CEO & Whole Time Director (LITL -EPC)

REFORMING POWER SECTOR IN INDIA

Policy actions
EA 2003 introducing Non-discriminatory open access transmission Sec 63 - ERCs to follow competitive bidding process Sec 79(2) - CERC to advise GoI on promoting competition Section 60 Controlling abuse of market power Competitive Bidding Guidelines National Tariff Policy

Evolving market structure in power sector

National Tariff Policy

Open access Competitive bidding

Comp. Bidding Guidelines Electricity Act 2003

Contestable Price Discovery

Competitive new generation Possible Wholesale / Retail Competition

Open Access, Sec 63/ Section 79( 2)/ Sec 60

Need of Electricity Act, 2003

Inability to meet the growing demand. Poor quality of supply- low voltage, grid instability Vertically Integrated SEBs
Only SEBs entitled to buy or sell electricity Generation and Supply largely owned by state or central sector companies Inefficiencies leading to enormous losses in the system

Private participation almost non-existent

Generation needed license. No significant participation in Transmission, distribution. Cost plus model followed by generators and distributors. Power traded through Long Term PPAs of 25 years. Large captive capacities come up due to continued poor and inadequate supply

Complete absence of competition

Electricity Act, 2003

Consolidates laws of electricity relating to generation, transmission, distribution and trading of electricity. Creates environment conducive for development of electricity industry and Introduction of competition in the Sector. Formation of National Electricity Policy and National Tariff Policy. Open Access for Transmission /Distribution Systems allowed. De-licensing of power generation. Trading of electricity permitted. Liberal provisions for captive power generation.

Rural generation and distribution freed from licensing. Expanded role for the Regulatory Commissions tariff determination etc Role of CEA reduced. Envisages unbundling of transmission and distribution. The Regulatory Commission to promote development of market including trading.

EA 2003 sets the stage for Competition

Allows multiple generators to come up and compete Allows larger consumers to choose supplier Prescribes competitive procurement of power on long term Aims to create a National Market via compulsory open access Policy framework assures

Reasonable and stable returns on investments

Well defined Regulatory mechanisms

Makes governments responsible for providing Power on demand

How Does Competition Help?

Allow multiple participants to compete with each other to

Provide High Quality at Low Prices

Allow participants to manage their supply requirements by

Purchasing deficits from the market Selling excess to the market

Allow participants to manage the cost of supply

Purchasing lower cost supply from market and back-down expensive generation

Availability of an efficient market allows investors to set-up capacities

Part of long term capacity kept for sale as merchant capacity

Long term capacity is set-up without the commitment with the availability of
a market as a back-up

Legal and Policy Framework after Electricity Act 2003

National Electricity Policy 2005 announced. Guidelines for determining tariff through competitive bidding notified 2005 5 Regional Power Committees set up 2005 Electricity Appellate Tribunal : Operational 2005 CERC notified regulations for open access in transmission 2005

Tariff Policy notified in 2006

Guidelines for private investment in transmission 2006 Several SERCs-open access in Distribution action initiated

National Electricity Policy

The objectives as per the National Electricity Policy, 2005 is as follows: Total village electrification by year 2010 Following milestones to be achieved by year 2012 :

Per capita consumption of 1000 units.

Installed capacity over 200,000 MW. Spinning reserves 5% .

Minimum lifeline consumption of 1 unit per household per day.

Inter-regional transmission capacity 37,000 MW. Energy efficiency/ conservation savings about 15%.

National Tariff Policy

Aims & Objectives of Tariff Policy

Ensure availability of electricity reasonable & competitive rates Ensure financial viability and attract investments Promote transparency, consistency and predictability in regulatory approaches Promote competition, efficiency in operations and improvement in quality of supply

Provisions of Tariff Policy

Procurement by distribution companies shall be done at through competitive bidding. Mandates competitive procurement of power and transmission services transitional window of 5 years period given to public sector companies. Promote Multi-Year Tariff (MYT) framework. Encourage loss reduction strategies. Progressive reduction in cross-subsidy. SERC shall fix a min % for purchase of energy from renewable considering Availability of such resources in the region, and Its impact on retail tariffs. CERC should lay down guidelines for pricing non-firm power, especially from non conventional sources, where procurement is not through competitive bidding. Encourage efficiency in operations by sharing of gains between licensees and consumers

Competitive Bidding Guidelines

Issued by the Ministry of Power on 19th January 2005. Promote competitive in procurement of electricity. Facilitate transparency and fairness in procurement processes
Transparency is ensured by the Guidelines & Standard Bid Documents for tariff based bidding Information regarding site, water, fuel linkage, other clearances & project details are made available to bidders before start of bidding process

Standardization of Bid documents , Bid submission and evaluation process, timeline for the bidding process, Tariff structure Tariff to be quoted upfront for the life of the plant and the Regulator to adopt the tariff arrived through transparent bidding process Developer has the flexibility to choose optimum unit configuration.

Provides incentive to Developer to adopt innovative financial modeling and tax

planning to ensure competitive tariff & return on investment Protect consumer interests by facilitating competitive conditions in procurement of electricity

Case 1 and Case-2 Bidding

Bidding Mechanism

Case-I Bidding

Case-2 Bidding

Location/ technology/ fuel not specified. Generally done by the individual state. Power developer bids for the portion or the total power generated. Bidder responsible for clearances/ approvals etc. More relevant for states with limited fuel sources. Higher risk for developer Lower risk for state

Land/ fuel provided by procurer. Can be done by one or more states by the formation of SPV. The whole power is procured produced from the power plant. States responsible for facilitating all the clearances More applicable for states where fuel sources are available or costal areas exist. Higher risk for State Lower risk for developer

Tariff under Case 2 is expected to be lower than that under Case 1

Case 1 and Case-2 Bidding

Case 1 Bid Location, Technology, Fuel not specified by Procurer. Case 2 Bid Location w.r.t specific Project wherein Procurer intends to set-up Power Plant is fixed. Technology is also fixed (Super Critical/Sub Critical). Option of Fuel arrangement could be either by Procurer or left to the Bidder.

Only quantum of Power & Delivery Contracted Capacity is mentioned. point is mentioned. Supply is at generator bus-bar.

Case 1 Bid - Qualification Requirement

Technical
Land Bidder should have acquired and have taken possession of at least 50% of the area of the land. In case of land to be acquired under the Land Acquisition Act, the Bidder shall submit copy of notification issued for such land under Section 4 of the Land Acquisition Act Domestic Coal Firm arrangement mine allocation/fuel linkage Imported Coal - either acquired mines having proven reserves for at least 50% of the quantity of coal required to generate power. OR shall have fuel supply agreement for at least 50% of the quantity of fuel required for a term of at least 5 years or the term of the PPA (which ever is less) Domestic Gas - Firm arrangements for fuel tie up by way of long term fuel supply agreement for the quantity of fuel required to generate power from the generation source for the total installed capacity Bidder should have acquired approval for qty of water reqd

Fuel

Water

Environment & Bidder should have submitted proposal for Environment & Forest Clearance Forest Clearance

Financial

Networth @ Rs 0.50 Cr/MW

Case 2 Bid - Qualification Requirement

Technical
Experience of developing projects (not Out of these projects, the capital cost of necessarily in the power sector) in the last at least one project should be equivalent 10 years, whose aggregate capital costs or more than Rs. 0.125 Crore. must not be less than the amount equivalent to Rs. 0.75 Crore.

Developing project means successful commissioning of a project in which the Bidder/Parent/Affiliate, as the case may be, held equity stake of not less than 26% from the time of financial closure till the time of commissioning of such project.

Financial
IRG @ Rs 0.3 Cr/MW Networth @ Rs 0.50 Cr/MW for capacity upto 2000 MW & Rs 0.25 Cr/MW for capacity exceeding 2000 MW Annual Turnover @ Rs 1.20 Cr/MW for capacity upto 2000 for capacity exceeding 2000 MW

MW & Rs 0.25 Cr/MW

Tariff Components
Component 1. Fixed Charges Designated To
Capacity Charges

Consideration
Escalable Capacity Charges

To be Quoted
First year charges escalated as per rates prescribed by CERC. Same Value for term of agreement First year charges escalated as per rates prescribed by CERC.

2. Fixed Charges 3. Variable

Charges

Capacity Charges Energy Charges

Non Escalable

Escalable Capacity Charges

4. Variable
Charges

Energy Charges

Non Escalable Capacity Charges

Same Value for the term of Agreement

Features of PPA
Terms of Agreement - Condition Precedent/Subsequent to be satisfied by the Seller and Procurer Right to Available Capacity and Scheduled Energy Liquidated Damages For Delay on account of Seller: LD @ Rs 10,000/MW/day upto delay of 60 days from COD LD @ Rs 15,000/MW/day for delay > 60 days from COD

For Delay on account of Procurer: To pay Capacity Charges on Normative Availability for delay period Coordination of Construction Activity Synchronization, Commissioning and Commercial Operation Billing and Payment Third party sale on default Force Majeure Change in Law Termination on Events of Default

Benefits of the Competitive Bidding Guidelines

Cost Plus to Competitive Regime to Mature Market. Shift from the Concept of ROE to IRR. Thrust on Rapid Capacity Addition. Potential Players Encouraged. Lower Project Cost.

Competitive Tariffs.
Faster Development of the Projects.

Higher Benchmark of performance : Heat rate, Auxiliary Power

Consumption, Availability etc.
Ultimate Benefit to Consumer

Bidding Trends
Generation - Case II Bids Project Sasan UMPP Mundra UMPP Krishnapatnam UMPP Tilaiya UMPP Bhaiyathan Talwandi Sabo Jhajjar Lev Tariff 1.196 to 2.251 2.264 to 3.746 2.4914 to 4.197 1.7704 to 2.756 0.81 to 2.387 2.864 to 3.15 2.996 to 3.82 Generation - Case I Bids State Gujarat MP Haryana Gujarat MSEDCL I MSEDCL II PCKL Lev Tariff 2.25 to 2.89 2.34 to 3.044 2.355 to 2.94 3.2 to 3.79 2.7 to 3 2.88 to 3.45 3.7 to 5.5 Transmission Bids Agency PFC REC N Karanpura REC Talcher II Quote Rs mn/annum 1400 to 2400 2580 to 5340 1440 to 4479

Bara
Rajpura Karchanna Dhopave

3.021 to 3.984
2.889 to 3.29 2.97 to 3.984 3.666 to 4.045

Rajasthan
U.P A.P NPCL

3.2
3.24 to 4.3 3.4 to 5.5 4.08 to 5.4

Concerns Case 1 Bidding

Land: Acquisition of 50% land ! Should be reduced to 25%, in order to increase competition Fuel: Firm Fuel Arrangement ! In case the bidder has applied for coal linkage and its application is in priority list with LT-SLC , then it should be considered.

Imported Coal - In case if bidder quotes based on use of Imported Coal, its
bid is not at par with the bidders who quotes via domestic coal Hence, parity needs to be bridged !

Fuel Linkage for the phase of Power Station Bidders are free to quote
w.r.t the phase of Power Station and hence they require the fuel linkage only for the said phase as bidded and not for the other phase/Power

Station - Still its is not being followed by all Procurers !

Concerns Case 2 Bidding

Case 2 Bids are not being invited by the States in expeditious manner, due to the following key issues a. Difficulty in Land Acquisition b. Firm Fuel arrangement c. Delay in Environmental Clearance Example State Karnataka Project PCKL is trying its best to select the developer for establishment of 1320 MW of Gulbarga (Jewargi) Thermal Power Plant through competitive bidding since 2007, however due to non-availability of fuel the bid is still on hold (after RFQ).

Winning Strategies for the Investors (Case- 1)

Pre-bid tie-ups to be in place for the proposed project from where the power will be supplied Fuel Water Land All Clearances (environmental clearance, forest clearance, Airport Authority Clearance etc ) Assessment of the fuel transportation cost The cost of developing the fuel infrastructure like - MGR, Conveyor system, Coal jetty etc The transmission cost - wheeling charges The cost of developing the dedicated transmission line

Winning Strategies for the Investors (Case-2)

Government support for land, fuel, water, clearances etc (Platter Approach)

EPC
Commitment of major equipments Cost and Delivery schedule Determination of performance guarantee parameters heat rate, auxiliary power consumption, availability etc

Payment Terms
Hedging for the exchange rate variation. In case of captive mining - Assessment of Mine development Cost - Estimate of the Calorific value Cost of developing fuel transportation infrastructure - MGR, Conveyor system etc Tie - up for the Imported coal Cost of Fuel Transportation freight charges

Fuel (Domestic)

Fuel (Imported)

Winning Strategies for the Investors

Financing Assumptions :

Debt equity ratio,

Interest rate Low cost fund from the Government ECB borrowing, like Exim banks from where the equipments are sourced Longer loan repayment period

Option of Re-financing

Tie-up with OEMs for the spares or creating a pool of spares among the power project developers Selling of By-products like ash/ash brick etc

Selling of CERs (If the project qualifies)

Vertical Integration to enter into logistics sector to reduce transportation cost Incentives for going with the cleaner technology like supercritical/ IGCC

A Way Forward.
Transmission and Distribution next focus area.

Policy formulation to enable participation of more private players and transparency in transmission and especially in distribution.
The progress of privatization in distribution is slow, mainly due to lack of political will as it extremely people centric activity.

People think that privatization is against the interest of the consumers

Privatization of distribution is being attempted in two ways.
The first is the sale of a government-owned discoms to private (eg Orissa, Delhi, Ahmedabad, Surat, Mumbai etc) - large mobilization, require major infusion of money, large risk to to state and private company. Second is through appointment of a private distribution franchisee, particularly for loss making circles (Maharashtra Bhiwandi, Nagpur, Aurangabad, Uttar Pradesh Agra Kanpur, Bihar Patna, Gaya, Muzzafarpur, Bhagalpur, several others under the pipeline) - more controlled, focused approach, can be managed with limited funds, implementation is smooth but slow.

Privatization of distribution circles, under the franchisee model, has so far been possible only in select states.

Thank You

Facts About Indian Power Sector

Power Supply Position during Feb 2011
Energy shortages - 7.2% Peaking deficit - 10.2 %

Generating plants PLF (April 2010 - Feb2011) All India- 74.33% Almost 100% of Electricity Transmission in India is owned by public sector. About 13 % of Electricity Distribution in India is owned by private sector. All India Aggregate Technical & Commercial (AT&C) losses were 34.54% in the year 2005-06 which reduced by 2.11% to 32.47% in the year 2006-07. AT&C losses varies from 12.65% to 67.68% during 2006-07 in different States. Metering Status:

23 States have achieved 100% Metering at 11 KV Feeder level. 9 States have achieved 100% consumers metering
Source : CEA

Examples for Case - 1

Procures Total Installed Capacity (MW) 1200 1200 3000 1320 1980 1200 2000 Successful Bidder Lanco Essar (Tori) KSK Adani Adani Adani GMR Tariff (rs/unit) Capacity offered (MW) 1.91 2.29 2.34 2.89 2.94 2.95 2.59 1000 450 1010 1000 1424 1200 200

Uttar Pradesh Bihar Gujarat Gujarat Haryana Rajasthan Maharashtra

Examples for Case - 2

Procures Capacity (MW) Successful Bidder Tariff (rs/unit)

UMPP
Sasan, MP Krishnapatnam, AP Mundra, Gujarat Tilaiya, Jharkhand Karchana, UP Bara, UP Rajpura Punjab Talwandi Sabo, Punjab Jhajjar, Haryana Bhaiyathan, Chhattisgarh 4000 4000 4000 4000 Others 1320 1980 1320 2000 1320 1320*60% Jaiprakash Jaiprakash L&T Sterlite CLP India Bulls 2.97 3.02 2.89 2.86 2.99 0.81 Reliance Reliance Tata Reliance 1.196 2.336 2.265 1.77

Examples for Transmission Projects

Procures
North Karanpura Talcher-II North East Interconnection WRSS Project B WRSS Project B

Successful Bidder
M/s Reliance Power Transmission Ltd. M/s Reliance Power Transmission Ltd. M/s Sterlite Technologies Ltd. M/s Reliance Power Transmission Ltd. M/s Reliance Power Transmission Ltd.

Levelised Tariff (rs million/anuum)

2580.0051 1440.0215 1187.950 084.899 564.743